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UNIVERSITY  OF  ILLINOIS 

' URBANA 


lien*  ^ovk  $uperiot  <2T outt. 


GENERAL  TERM. 


RUFUS  HATCH. 


J he  Western  Union  Telegraph  Company  and  others. 


BRIEF  FOR  PLAINTIFF. 


Counsel  for  Plaintiff. 

WILLIAM  A.  BEACH, 
A.  P.  WHITEHEAD, 
WM.  FULLERTON, 
ROBT.  SEWELL, 

R.  W.  RUSSELL. 


JERSEY  CITY  : 

The  Evening  Jovrnai.  Job  Print.  87  Montgomery  Street. 

1882. 


Digitized  by  the  Internet  Archive 
in  2016 


https://archive.org/details/rufushatchvswestOOhatc 


X?  W 


3S.r 


INDEX. 


PAGES. 


Statement  of  the  Case 1-3 

As  to  the  opinion  of  Judge  Truax  as  reported  in  the  Reg- 
ister   3-4 

The  Findings  of  Fact  and  Law  by  Judge  Truax  in  Regard 
to  the  Alleged  Estoppel 4-9 

Judge  Truax's  Construction  of  2 Rev.  St.,  6 Ed.,  p.  398. . . . 9-12 

No  Stock  Dividend  can  be  made  to  Represent  Net  Earnings 
Applied  Years  Ago  to  the  Extension  of  the  Company’s 
Works  or  Lines,  &c 11-13 

Judge  Truax’s  Proposition  that  Companies  May  Enlarge 
their  Stock  to  the  Extent  of  the  Estimated  Value  of  their 
Property  from  Time  to  Time 13-16 

Personal  Liability  of  Stockholders  for  Watered  Stock 17-19 

Judge  Truax  on  the  Original  Articles  of  Association 19 

Point  1. 

Plaintiff  Not  Estopped 20 


Point  2. 

J 

The  Act  of  1870,  Ch.  568,  not  to  be  Construed  so  as  to 
Authorize  Purchases  of  Competing  Parallel  Lines 21 

Point  3. 

The  Proceedings  had  Under  the  Supposed  Authority  of  the 
Act  of  1870  were  not  in  Accordance  with  the  Provisions 
r of  that  Act  and  were  Inoperative 22 

Point  4. 

The  W.  U.  could  not  Acquire  by  Purchase  the  Competing 
— Lines  in  Pa.  and  Ohio 23 

Point  5. 

’The  Am.  Un.  and  A.  and  P.  could  not  make  Title  to  the 
Lines  Outside  of  the  State  of  New  York 

- 


2069 


23 


ii 


Point  6. 

PAGES. 

The  Contract  of  19  Jan’y,  1881,  became  Void  by  its  Own 
Terms  (Section  10) 25 

Point  7. 

Increased  Shares  of  Stock  must  be  Paid  for 26 

Point  8. 

Stock  Dividends  cannot  be  Made  to  Represent  Earnings 
made  Many  Years  Before,  and  which  have  been  In- 
vested   26 

Point  9. 

The  Plaintiff  can  Maintain  this  Action,  although  the  W.  U. 

Tel.  Co.  might  not  be  able  to  maintain  an  Action  to  re- 
scind the  Contract  in  Question 27 

Point  10. 

The  Plaintiff  is  not  Dependent  on  the  Action  of  the  Attor- 
ney General 27 

Point  11. 

The  Denial  of  the  Motion  for  an  Injunction  in  the  Case  of 
Hatch  v.  W.  U.  Tel  Co.  in  the  Supreme  Court  is  no 
Estoppel 27 

Point  12. 

There  is  no  Equitable  Estoppel  in  pais 28 

Point  13. 

As  to  the  Decree  Prayed  for. 

Effect  of  the  Partial  or  Complete  Performance  of  an 
Illegal  Act.. 28-33 

Opinion  of  Judge  Truax  in  the  Hatch  Case  as  Reported  in 
the  N.  Y.  Register 28-33 

Opinion  of  Judge  Truax  in  the  Williams  Case 37-46 


f 


38^ 

P)  3 2 ^ LIBRARY 

UNIVERSITY  OF  ILLINOIS 


iku?  <Moth  J^upetiut  Couit. 

GENERAL  TERM. 


Rufus  Hatch 

v. 

The  Western  Union  Telegraph 
Company,  and  others. 


BRIEF  FOR  PLAINTIFF  ON  APPEAL, 


This  action  is  brought  by  plaintiff,  as  a stockholder 
of  the  Western  Union  Telegraph  Company,  to  obtain  an 
adjudication  that  a certain  contract  purporting  to  be 
made  by  the  Western  Union  Telegraph  Company  with 
the  American  Union  Telegraph  Company  and  the  At- 
lantic and  Pacific  Telegraph  Company,  dated  19th  Jan- 
uary, 1881,  with  a supplement  thereto,  dated  3d  Feb- 
ruary, 1881,  for  the  purchase  of  the  telegraph  lines  and 
privileges  of  the  two  last-named  telegraph  companies  was 
ultra  vires,  and  especially  that  a stock  dividend  made  by 
the  Western  Union  Telegraph  Company  for  distribution 
amongst  its  stockholders  of  155,265  shares  ot  its  stock 
was  illegal. 


2 


The  answers  of  the  defendants  claim  that  the  contract 
in  question  is  valid,  and  that  it  has  been  fully  performed, 
and  that  plaintiff  has  no  cause  of  action. 


An  action  was  brought  by  Mr.  Hatch  in  the  Supreme 
Court  on  19th  January,  1881,  to  prevent  the  consolida- 
tion of  the  rival  telegraph  companies.  The  complaint 
(see  Case,  p.  400)  alleged  that  a scheme  for  such  consolida- 
tion was  projected,  but  in  what  manner  it  was  to  be  ac- 
complished, whether  by  leasing  or  purchasing  plaintiff 
knew  not. 

Case , p.  355-400. 

In  that  case  amotion  for  a preliminary  injunction  was 
made  before  J udge  Barrett,  and  the  objection  was  taken 
that  the  Act  of  1870  did  not  authorize  the  consolidation 
of  competing  lines,  and  that  the  contract  for  the  consoli- 
dation was  made  corruptly  and  fraudulently.  Judge 
Barrett  held  otherwise,  and  refused  the  injunction. 

See  1 laintiff  s Brief  in  the  present  case,  before  Judge 
Truax,  page  19  to  26,  as  to  the  construction  of  the  Act  ' 
of  1870.  | 

The  action  in  the  Supreme  Court  was  discontinued  by 
Mr.  Hatch  (Case,  p.  355). 

Mr.  William  S.  Williams  brought  an  action  in  this  j 
Court  on  February  12th,  1881,  to  prevent  the  consolida-  j 
tion.  An  injunction  order  was  obtained,  and  a motion 
to  dissolve  that  injunction  was  refused  by  Chief  ! 
Justice  Sedgwick. 

His  opinion  is  printed  in  Plaintiff’s  Brief  in  Court  below, 
p.  106  to  115,  and  was  that  the  Western  Union  had  no' 
legal  power  to  make  a stock  dividend  of  shares  of  its 
stock  to  represent  the  earnings  of  the  Company  which 
had  been  invested  during  sixteen  years  in  making  addi- 
tions and  improvements  to  the  lines  of  the  Company. 


Thereupon  Mr.  Hatch,  on  March  14,  1881,  brought 
the  present  action  to  prevent  the  Western  Union  from 
issuing  and  paying  out  the  155,265  shares  of  its  stock, 
and  to  obtain  a decree  that  the  contract  for  the  consoli- 
dation is  invalid. 

The  question  was  fully  argued  before  Judge  Speir  on 
motion  to  dissolve  an  injunction  order.  The  motion  was 
refused. 

Judge  Speir’s  opinion  will  be  found  in  plaintiff’s  Brief 
in  Court  below, page  116  to  123. 


As  to  the  Opinion  of  Judge  Truax  in 
this  Case. 

The  New  York  Register  of  23d  June,  1SS1,  contains 
what  purports  to  be  a report  of  the  opinion  of  Judge 
Traux  in  this  case.  See  copy,  post  page  21. 

But  his  opinion  was  not  filed  (affidavit  of  White- 
head.  Case,  fob  1148);  and  it  is  not  known  whether  the 
report  in  the  Register  is  correct. 

Judge  Truax,  in  his  opinion  as  reported  in  the  Regis- 
ter, refers  to  his  opinion  in  the  case  of  Williams  v.  W. 
U.  Tel.  Co .,  and  declines  to  repeat  that  opinion. 

In  his  opinion,  in  the  present  case,  he  discusses  the 
question  whether  the  sales  by  the  American  Union  and 
Atlantic  and  Pacific  Telegraph  Companies  violate  the 
laws  of  the  United  States  and  of  Ohio  and  Pennsylva- 
nia, and  quotes  at  length  the  opinion  of  J ndge  Blatcli- 
ford  on  Section  5265  R.  S.  U.  S. 


See  on  this  question  Plaintiff's  Brief  in  the  Court  be- 
low, pp.  30,  31. 


4 


Judge  Truax  s opinion  in  this  case  makes  no 
reference  to  his  finding  that  plaintiff  is  estopped  on  the 
ground  that  he  bought  part  of  his  stock  on  which  he 
sues,  viz.,  100  shares,  a day  before  the  contract  in  ques- 
tion was  made  between  the  telegraph  companies,  and 
that  he  was  aware  of  the  intention  to  make  that  contract, 
and  that  he  bought  400  shares  after  the  contract  had  been 
made,  knowing  that  fact. 

Nor  does  his  opinion  allude  to  the  point  made  in  his 
6th  finding  of  law,  thus : 

E\en  if  the  said  agreements  were  ultra  vires  of  the 
Western  Union  Tel.  Co.,  while  executory,  they  are  so  far 
executed  that  no  stockholder  of  said  company  has  any 
equity  to  bring  an  action  to  restrain  their  complete  per- 
formance.” 

Case , fol.  566. 


The  Findings  of  Facts  and  Law  by  Judge  Truax  m ‘ 
Regard  to  the  Alleged  Estoppel . 

The  1st  Finding  of  facts  (fol.  533)  is  that  the  plaintiff  ' 
Hatch  owned  on  18th  January,  1881, 100  shares  of  the  ! 
W.  U.  stock.  ; 

“ bought  the  said  100  shares,  knowing  that  the  ■ 
agreement  dated  January  19th,  1881,  mentioned  in  the  1 
5th  article  of  the  complaint,  was  being  negotiated  and 
substantially  agreed  to ; and  he  bought  the  said  400 
shares  knowing  that  the  said  agreement  had  already  been 
made.” 

An  exception  was  taken  to  this  finding  (Case,  fol. 
1121,  exception  1.) 


The  7th  Finding  of  matter  of  law  is  thus  (Case  fol 
567):  * 


Seventh — “ The  plaintiff,  having  purchased  his  stock 
w(th  notice  of  the  said  agreements,  has  no  standing  in 
court  to  bring  an  action  to  restrain  their  complete  per- 
formance.’' 

An  exception  was  taken  to  this  finding. 

{Case,  f 61.  1140,  29 th  Excep.) 

The  above-mentioned  findings  of  Judge  Truax  are  not 
sustainable  either  in  fact  or  in  law. 

There  is  no  proof  that  plaintiff  knew  that  the  agree- 
ment dated  19th  January,  1881,  “ was  being  negotiated 
and  substantially  agreed  to." 

Nobody  could  tell  before  the  several  Board  of  Direct- 
ors took  action  in  the  matter  what  contracts  would  be 
made  by  them.  And  nobody  could  tell  what  action  the 
stockholders  of  the  three  companies  would  take. 


The  plaintiff  could  at  most  have  merely  heard  rumors 
about  a proposed  consolidation. 

It  is  proved  by  the  stock  ledger  of  the  W.  IT.  Tel.  Co. 
that  on  January  1 8th,  1881,  there  was  a transfer  of  100 
shares  of  the  stock  of  that  company  to  Rufus  Hatch. 
Testimony  of  Morton  (Case,  fob  578  . 


The  defendants  put  in  evidence  Hatch’s  complaint  in 
the  case  of  Hatch  v.  The  W.  U.  Tel.  Co.  in  the  Supreme 
Court  (which  was  discontinued). 

(Case,  p.  355,  fol.  1063  and  p.  400.) 

The  Judge  held  it  to  be  admissible  for  the  purpose  of 
showing  Hatch’s  knowledge  on  19th  January,  1881,  of 
the  contract  of  that  date. 

(Case,  p.  355 ,fol.  1063.) 

The  complaint  in  Supreme  Court  (Case,  p.  *00)  alleges 
that  the  defendants  intended  to  establish  a monopoly  of  the 
telegraph  business  and  to  establish  the  former  higher 
rates  for  telegraph  messages. 

(Case,  fol.  1213.) 


6 


; But  in  what  way  [foh  1214-1219]  or  by  what  means 
it  is  intended  to  accomplish  that  object  this  plaintiff  is 
unable  more  particularly  to  set  forth  to  the  Court,  as  the 
said  companies  and  their  directors,  conspiring  as  afore- 
said,. have. not  yet  divulged  to  the  public  the  exact  man- 
ner in  which  the  end  aforesaid  is  to  be  accomplished.” 

” But  this  plaintiff  positively  charges  that  negotiations 
are  now  on  foot  between  the  three  defendant  corpora- 
1011s  or  their  directors  having  in  view  the  accom- 


r , view  me  aceom- 

p ishment  of  some  such  consolidation  or  amalgamation 
as  will  attain  the  end  of  re-establishing  the  v.  onopoly  of 
the  Western  Union  Telegraph  Company  in  the  entire 
business  of  telegraphing  throughout  the  United  States 
of  America  to  the  manifest  disadvantage  and  damage  of 
the  public,  contrary  to  good  morals  and  to  the  mani- 
fest detriment,  hindrance  and  annoyance  of  trade  and 
commerce  between  the  States  and  to  the  great  damage  of 
tlns.phimtiff  and  all  other  stockholders  in  the  American 
Vnion  Tel.  Co.,  who  have  subscribed  to  the  stock  of 
said  Company  in  the  belief  and  expectation  that  said 
Company  would  be  maintained  as  a.,  independent  line 
and  would  gradually  obtain  the  patronage  of  a large 
majority  of  the  business  public  of  this  country. 

“And  unless  the  defendants  are  prevented  therefrom  bv 
an  order  of  this  Court,  or  of  some  other  court  of  compe- 
tent jurisdiction,  they  will  immediately  enter  into  such 
mlawfu  agreement,  in  violation  of  law  and  of  the  rights 
of  the  plaintiff  and  all  other  stockholders  in  the  Ameri- 
can  t nion  Company  similarly  situated  with  him  not- 
withstanding that  such  proposed  lease,  consolidation 
purchase  sale  or  agreement  has  not  been  ratified  by  the 
consent  thereto  in  writing,  or  by  vote  at  a general Let 
ing  duly  called  for  the  purpose,  of  three-fifths  in  interest 
fend^  feithei‘0Ue  °f  tLe  colTorations  de- 

“And  pla;‘Utiff’  011  '“formation  and  belief,  alleys  that 

such  consent  cannot  be  obtained ° 1 


4 

“ That  said  defendants,  their  agents,  directors  and  offi- 
cers threaten  and  intend,  and  this  plaintiff  verily  believes 
they  will  accomplish,  unless  they  are  stopped  by  an  order 
of  this  honorable  Court,  the  amalgamation  or  consolida- 
tion of  all  of  the  corporations  defendant  herein  in  some 
shape  or  another , whether  the  same  will  take  place  by 
leasing  of  the  lines  of  the  American  Union  Tel.  Co.  by 
the  Western  Union  Tel.  Co.  or  by  a consolidation  of  the 
several  corporations  defendant,  or  by  the  purchase  of  the 
lines  of  the  American  Union  Tel.  Co.  by  the  Western 
Union  Tel.  Co.  9. 

But  exactly  in  what  manner  it  is  intended  to  accom- 
plish said  unlawful  purpose  this  plaintiff  is  unable  to 
state  definitely  and  certainly  until  he  has  obtained  dis- 
covery thereof  in  this  action.” 


There  is  no  testimony  showing  that  plaintiff  knew  the 
terms  of  the  proposed  contract  before  he  became  a stock- 
holder of  the  W.  U.  on  18tli  January,  1881,  nor  that  he 
knew  the  terms  of  it  on  the  19th  January — the  date  of 
the  verification  by  him  of  his  complaint  in  the  Supreme 
Court,  and  the  date  of  the  contract  in  question. 

And  even  if  there  had  been-  such  testimony  it  would 
have  been  of  no  legal  importance. 

See  Plaintiff's  Brief  in  Court  below , 
page  73. 

The  defendants  took  the  following  testimony  on  this 
point : 

John  Van  Horne,  Case,  p.  328. 

James  H.  Banker,  Case,p.  355. 

Washington  E.  Connor,  Case,  p.  348  to  355. 

Ct.  P.  Morosini,  Case,  p.  353. 

Dr.  Creen,  Case,  p.  261,  262. 

The  two  first-named  gentlemen  were  directors  of  the 
W.  U.  They  testify  that  they  knew  a few  days  before 


8 


19th  January,  1881,  that  a consolidation  or  amalgama 
tion  scheme  would  be  proposed  and  submitted  to  tin 
boards  of  directors  and  stockholders  of  the  three  com 
panies.  / 

Mr.  Connor  says  (Case,  pages  348  to  355)  that  Mr 
Hatch,  as  early  as  the  16th  January,  complained  of  somt 
proposed  project  for  uniting  the  telegraph  com 
panies,  but  does  not  show  that  either  Hatch  or  himsell 
knew  what  the  project  was. 

Mr.  G.  P.  Morosmi  states  that  before  the  date  of  the 
contract  of  19th  January,  he  had  conversation  with 
plaintiff,  who  said  he  would  oppose  the  consolidation  1 
unless  they  would  take  in  his  American  Union  stock  at  1 
11*1.  W itne'ss  says  that  plaintiff  asked  witness  forinfor-  ^ 
mation  “ about  some  pending  agreement,”  but  does  not 
state  that  he  gave  such  information,  or  that  he  himself  ' 
knew  the  particulars  of  the  scheme.  ; ' 

Case , page  353.  ( 

Pr.  Green  testifies  that  it  took  to  the  19th  January  to' 
get  the  contract  ready,  and  he  adds  that  “it  was  kept 
profoundly  secret  from  everybody  ; so  far  as  I am  con- 
cerned as  to  that  I can  answer.”  ! ] 

And  he  adds : “ When  parties  applied  to  me,  I said;  i 
that  an  agreement  had  been  reached  by  the  Board,  hut!  1 
until  it  was  confirmed  I declined  to  give  its  terms.”  a 

Case,  page  261  and  262.  • ; „ 

There  is  nothing  in  the  testimony  of  those  witnesses 
to  gainsay  the  sworn  statement  of  Mr.  Hatch  in  his  com- 
plaint m the  Supreme  Court  (which  defendants  have 
made  evidence),  that  he  did  not  know  whether  the  plan  ei 
was  to  take  leases,  or  make  purchases  or  pooling  arrano-e-  4 
ments.  ^ 0! 

And  it  appears  very  clearly  on  the  face  of  that  com-  C 
plaint  that  he  did  not  know  that  a part  of  the  scheme  C( 
was  to  make  an  illegal  issae  of  watered  stool'.  st 


9 


See  Points  18, 19,  20  in  Plaintiff’s  Brief  in  the  Court 
beloio,  in  reply  to  the  argument  of  defendants"  counsel 
that  plaintiff  is  equitably  estopped  from  bringing  this 
action  ( pa/jes  83  to  96). 


This  action  was  brought  March  15,  1S81. 

Judge  Sedgwick  had  before  that  time  delivered  an 
opiuion  in  the  Williams  case  that  the  Western  Union 
had  no  legal  right  to  issue  the  155,265  shares. 

And  yet  the  W.  U.  Tel.  Co.,  as  shown  by  the  complaint 
in  the  present  case,  persisted  in  paying  out  on  account  of 
that  stock  the  funds  of  the  Company  to  the  parties  who, 
according  to  the  contract  of  19th  January,  1881,  were  to 
have  had  that  stock. 

Of  course  Mr.  Hatch,  as  a stockholder  of  the  West.  U. 
Tel.  Co.  had  the  right  to  object  to  such  misappropriation 
of  that  Company’s  funds. 

See  on  that  point  Plaintiff's  Brief  in  Court 
below,  pp.  92,  93. 

Judge  Truax  holds  that  the  laws  of  the  State  of  New 
York  do  authorize  the  West.  U.  Tel.  Co.  to  issue  stock 
for  the  value  of  property  which  it  had  accumulated  since 
1st  July,  1866;  and  further,  that  any  company  cau  issue 
additional  stock  to  represent  any  additional  value  which 
may  have  accrued  to  the  property  of  the  company. 

(Opinion  of  Judge  Truax  on  page  of  this 
brief.) 

Judge  Truax  holds  that  the  act,  2 Rev.  St.  (6  Ed.),  p.398, 
enacting  that  it  shall  not  be  lawful  for  any  company  “ to 
divide,  withdraw,  or  in  any  way  pay  to  the  stockholders, 
or  any  of  them,  any  part  of  the  capital  stock  of  such 
Company,  or  to  reduce  the  capital  stock,  without  the 
consent  of  the  Legislature,”  does  not  refer  to  shares  of 
stock,  but  means  the  property  of  the  company,  and  that 


10 


the  value  oi  the  additions  made  to  the  plant  of  the  W.  U. 
Tel.  Co.  since  I860  (which  is  undoubtedly  the  pi’operty  of 
the  Company  forming  part  of  its  capital  stock,  may  be  di- 
vided amongst  the  present  stockholders, and  that  the  Board 
of  Directors  may  decide  that  the  stockholders  shall 
not  have  a cash  dividend  to  the  amount  of  such 
value,  but  shall  have  additional  stock  allotted  to  them. 

This  theory  is  thoroughly  refuted  in  Judge  Sedgwick’s 
opinion. 

Judge  Truax  does  not  explain  why  he  holds  a different 
opinion,  and  in  fact  takes  no  notice  of  the  reasoning  of 
Judge  Sedgwick. 

The  words  u capital  stock,  as  used  in  this  section, 
mean  the  shares  of  stock.  It  prohibits  the  reduction  of 
those  shares,  not  the  reduction  of  the  property  of  the 
Company,  for  it  might  become  reduced  by  losses  in  the 
regular  and  proper  course  of  business. 

The  act  means  that  shares  of  the  Company’s  stock  ! 
held  by  the  Company  shall  not  be  divided  amongst  the 
stockholders.  Here  the  Company,  after  having  increased  \ 
the  number  of  its  shares  undertook  to  distribute  ' 
them  amongst  the  existing  stockholders  in  violation  of 
the  act. 

The  Company  could  not  sell  the  additions  made  to  the  ! 
plant  since  1866  and  divide  the  proceeds  amongst  the  5 
present  stockholders  by  devoting  the  proceeds  to  the  pay-  \ 
ment  of  a cash  dividend,  for  these  additions  form  an  in-  j 
separable  part  of  the  plant. 

Such  additions  consist  of  additional  wires,  offices 
patent  rights,  etc. 

Testimony  of  John  B.  Van  Evenj,  Case, 
pages  323  to  328. 


If  the  Company  chooses  to  dispose  of  part  of  its 
property  it  may  apply  the  proceeds  to  the  payment  of  a 
cash  dividend,  but  it  cannot  make  a stock  dividend. 


11 


The  stockholders  have  a right  to  a cash  dividend. 
Stock  dividends  cannot  be  made  in  this  State,  and  the 
stock  of  the  Company  cannot  be  divided  amongst  the 
stockholders. 

9 

The  provision,  2 R.  S.,  5 Ed.,p.  599,  sec.  2,  that  no  in- 
corporated company  of  this  State  shall  “ make  dividends, 
“ excepting  from  the  surplus  profits  arising  from  the 
“ business  of  such  corporation  ” is  a prohibition  of  stock 
dividends. 

That  section  reads  thus  : 

“ Sec.  2. — It  shall  not  be  lawful  for  the  directors  of 
managers  of  any  incorporated  company  in  this  State  to 
make  dividends , excepting  from,  the  surplus  profits  arising 
from  the  business  of  such  corporation ; and  it  shall  not 
be  lawful  for  the  directors  of  any  such  company  to  divide, 
withdraw,  or  in  any  way  pay  to  the  stockholders,  or  any 
of  them,  any  part  of  the  capital  stock  of  such  company, 
or  to  reduce  the  said  capital  stock  without  the  consent  of 
the  Legislature.” 

Was  not  this  provision  overlooked  by  the  Board  of  Di- 
rectors of  the  W.  U.  Tel.  Co.  when  it  passed  a resolu- 
tion on  March  2d,  1881,  affirming  that  “it  was  the  in- 
tention of  the  Directors  in  approving  said  contract  of 
January  19,  1881,  that  the  said  $15,523,590  should  be  a 
stock  dividend  ?” 

Case,  page  23 ±,fol.  701. 

Moreover,  independently  of  any  legislation  on  the  sub- 
ject of  a distribution  of  the  capital  stock,  or  the  making 
of  dividends,  common  sense  forbids  the  idea  that  the 
Western  Union  Telegraph  Company  could  make  a stock 
dividend  to  represent  net  earnings,  which  the  Board  of 
Directors  have  for  a series  of  years  applied  to  the  exten- 
sion of  its  works,  &c. 

See  Plaintiff ’s  Brief  in  the  Court  belov. v,  Point  13,  p. 

47  to  71. 

See  that  brief,  pages  106  to  123,  opinions  of 
Judges  Sedgwick  and  Spier. 


12 


Judge  Trnax  takes  no  notice  of  our  point  that  the  New 
York  statute  forbids  the  making  of  dividends  except  from 
surplus  profits.  He  refers  only  to  that  part  of  Sec.  2 It.  S., 
5 Edn.,  part  1,  oh.  18,  title  4,  page  599,  which  provides 
that  it  shall  not  be  lawful  for  the  Directors  of  any  such 
company  to  divide,  withdraw,  or  in  any  way  pay  to  the 
stockholders,  or  any  of  them,  any  part  of  the  capital 
stock  of  such  Company,  or  to  reduce  the  capital  stock,” 
&c. 

Tt  has  been  argued  by  defendants’  counsel  that  the 
Western  Union  Company,  in  making  the  stock  dividend 
in  question,  made  a dividend  from  the  surplus  profits. 
But,  as  observed  by  J udge  Sedgwick,  “ the  monies  already 
paid  nut  and  expended,  are  not  in  possession  of  the  cor- 
poration to  he  divided 

Bait  of  the  surplus  profits  have  been  invested  for  many 
years  in  enlarging  the  operations  of  the  Company,  and  1 
the  stockholders  for  the  time  being  have  always  had  the  : 
benefit  of  such  investment  in  the  shape  of  increased  i 
earnings  and  profits.  ' 

Sometimes  in  the  absence  of  any  legislation  on  the 
subject,  the  funds  available  for  a cash  dividend  are 
needed  for  an  extension  of  the  plant,  and  a stock  divi-  , 
dend  is  made  in  lieu  of  a cash  dividend.  This  mode  of  j 
proceeding,  however,  is  illegal.  \ 

The  object  can  be  accomplished  in  a legal  manner,  as  ■ 
shown  in  Plaintiff’s  Brief  in  the  Court  below,  pages  70  1 
and  71. 

Thus  a cash  dividend  is  made,  the  number  of  shares  is 
inc1  eased,  each  stockholder  has  the  option  to  subscribe 
for  his  fair  proportion  of  the  new  shares  and  to  have  his 
cash  dividend  applied  to  the  payments  of  his  subscription 
for  the  additional  shares. 

this,  which  is  the  proper  form  of  proceeding,  provid- 
ing, as  it  does,  for  the  just  rights  of  the  stockholders,  has 
not  always  been  followed  in  States  where  the  Legislature 


13 


has  not  limited  the  manner  of  making  dividends,  but  a 
simple  resolution  has  sometimes  been  adopted  that  the 
fund  at  present  available  for  a dividend  shall  be  applied 
to  the  account  of  capital,  and  that  a stock  dividend  shall 
be  made  instead  of  a cash  dividend.  • 

The  decision  of  the  Board  of  Directors  that  the  net 
earnings  shall  be  applied  to  the  capital  account  ma\  be 
complained  of  bv  any  stockholder  when  such  decision  is 
unjust  towards  him. 

See  Brief  in  Court  below,  p.  60.  But  it  cannot  be  dis- 
turbed by  him  if  he  has  acquiesced  or  failed  to  complain 
promptly.  If  net  earnings  have  been  improperly  applied 
to  the  account  of  capital  when  they  should  have  been 
used  for  a dividend  the  error  may  he  corrected. 

See  per  Lord  Hatherly  (Lord  Chancellor)  in  Z.  It., 
5 Ch.  Ap.,  p.  621,  Plaintiff's  Brief  in  Court  Below , 
page  60. 

It  is  not  alleged  in  this  case  that  any  part  of  the  earn- 
ino-s  during  the  last  16  years  have  been  unfairly  diverted 
from  the  dividend  account. 

The  idea  that  the  Company,  many  years  after  electing 
to  apply  its  earnings  in  whole  or  in  part  to  account  of 
capital,  can  decide  that  it  should  have  been  applied  to 
dividends,  or  that  it  shall  now  be  applied  to  dividends, 
and  that  new  shares  of  stock  shall  now  be  issued  to 
represent  the  amount  so  carried  to  capital  account,  receives 
no  countenance  from  any  legal  authority.  It  is  contrary 
to  principle  and  common  sense. 

As  observed  by  Judge  Sedgwick,  “ Surplus  profits  that 
have  once  existed,  but  that  no  longer  exist,  cannot  be  the 
basis  of  a dividend.” 

Judge  Truax  places  his  decision  mainly  on  the  broad 
proposition  that  the  shares  of  stock  of  any  incorporated 
company  in  this  State  may  be  increased  from  time  to 
time  at  the  will  of  the  Company  by  stock  dividends,  to 
the  extent  of  the  true  value  of  the  property  of  the  com- 
pany. 


14 


That  is  the  real  question  presented  in  this  case,  and  it 
is  a question  of  great  public  importance. 

See  Plaintiff’s  Brief  in  Court  below,  pages 
97,  98. 

If  Judge  Truax’s  proposition  be  correct,  incorporated 
companies  in  this  State  may  “water”  their  stock  as  much 
and  as  often  as  they  please. 

Judge  Truax  holds  that  a corporation  has  the  right  to 
issue  certificates  of  stock  to  the  amount  of  the  value  of 
its  property. 

If  that  be  so,  a corporation  may,  when  its  business  is 
prosperous,  increase  the  amount  of  its  shares  of  stock  by 
issuing  new  shares  without  anything  being  paid  for  them. 

And  yet  the  law  would  not  recognize  those  new  shares 
as  fully  paid  up  shares.  And  stockholders  in  Telegraph 
Companies  incorporated  in  the  State  would  be  held  per- 
sonally liable  to  creditors  for  an  amount  equal  to  25  per 
cent,  of  such  additional  stock. 

Laws  of  1853,  chap.  471,  sec.  4. 

See  Judge  Sedgwick’s  reference  to  this  enactment, 

Plaintiff' s Brief  in  Court  below,  p.  63-109. 


Judge  Truax  refers  to — 

Pierce  on  Laic  of  Railroads,  p.  123. 

Howell  v.  Chicago  cfc  JV.  IV.  R.  R Co.,  51 
Barb.,  378. 

Miller  x.  Illinois  Central  R.R.,  24  Barb., 331. 
Jones  v.  Tt  rre  Llaute  R.R.  Co.,  57  N.  Y.,  196. 
Boston  & Lowell  R.  R.  Co.,  100  Mass.,  399. 

See  these  cases,  commented  on  in  Plaintiff' s Brief  in 
Court  below,  page%  52  to  60. 

See  also  that  Brief , pages  110-111,  Judge  Sedgwick’s 
comments  on  Howell  v.  Chicago,  51  Barb.,  378. 


15 


Judge  Truax  says:  “ I do  not  mean  to  be  understood 
as  saying  that  a corporation  lias  a legal  right  to  issue 
certiti cates  of  stock  beyond  the  value  of  the  corporate 
property—  in  other  words,  that  a corporation  has  a right 
to  “ water”  its  stock.  I do  not  pass  on  that  question.”  ^ 

He  says  : “ Within  the  last  quarter  of  a century  a great 
many  corporations  have  “ watered  ” their  stock,  and  such 
transactions  have  frequently  been  before  the  courts  of  this 
and  other  States,  and  that  no  disapproval  of  such  trans- 
actions has  been  expressed.” 


It  is  to  be  observed  that  the  validity  of  the  “ watering” 
process  could  not  be  questioned  collate  rally . 

Thus  in  many  of  the  cases  referred  to  by  defendants, 
where  stock  dividends  have  been  made,  the  questions  be- 
fore the  Court,  related  to  the  rights  of  legatees,  &c.,  to 
such  stock ; and  the  court  had  nothing  to  do  with  any 
qneston  as  to  the  legality  of  the  action  of  the  corporation 
in  the  issue  of  the  stock. 

See  review  of  cases  cited  by  defendants , 
Plaintiffs  Brief  in  ( ’ onrt  below , p.  48  to 
50. 

Judge  Truax  holds  that  an  incorporated  company  may 
make  stock  dividends  for  gratuitous  distribution  amongst 
its  stockholders,  provided  that  the  total  amount  of  the 
stock  issued  shall  not  exceed  the  real  value  of  the  prop- 
erty of  the  company. 

Suppose  the  company,  forming  an  over-estimate  of  the 
value  of  its  property,  gives  its  stockholders  additional 
shares  of  its  stock,  is  the  validity  of  the  stock  in  the 
hands  of  an  assignee  thereof  dependent  on  the  ques- 
tion as  to  the  real  value  of  the  stock  when  the  increase  is 
made  ? 

It  could  not  be  said  that  a stock  dividend,  made  on  an 
estimate  of  the  increased  value  of  the  property  of  the 
company,  is  made  from  surplus  earnings — such  stock 


16 


dividend  not  being  for  or  on  account  of  any  surplus 
earnings  in  band,  but  on  account  of  a supposed  increase 
in  the  value  of  the  property  of  the  company. 

Such  increased  value  may  arise  from  various  causes 
such  as  the  removal  of  competition,  the  introduction  of 
improved  machinery,  &e.,  from  which  it  may  be  reason- 
ably supposed  that  there  will  be  in  the  future  large 
surplus  earnings  although  there  are  none  now  in  hand. 

It  is  evident  that  Judge  Truax  wholly  overlooked  the 
statutory  provision  limiting  dividends  to  “surplus 
earnings,  when  he  says  that  a company  may  increase  its 
shares  of  stock  by  making  stock  dividends,  provided  the 
total  amount  of  the  stock  shall  not  exceed  the  real  value 
of  the  property  of  the  company. 


d he  law  is,  that  additional  shares  of  stock  must  be 
paid  for. 

Plaintiff's  Brief  in  Court  below,  pages  41  to 
43—47  to  71—27,  28. 

It  has  been  argued  that  a stockholder  of  an  incorpo- 
lated  company  has  no  solid  ground  of  objection  to  the 
doubling  of  the  shares  of  its  stock,  because  he  gets  his 
proportionate  share— that  he  is  not  injured  by  the 
“ watering  ” process. 

As  to  this  argument,  see  Plaintiff's  Brief  in  Court 
bflow,  pp.  75  to  78. 

Evidently  a stockholder  has  a good  right  to  object  to  a 
wateiing  of  the  stock  (although  he  may  get  his  propor- 
tionate share)  thereof  when  such  watering  is  prohibited. 

The  additional  shares  are  distributed  as  a stock  divi- 
dend, and  that  is  prohibited  by  the  statute  (2  R.  S.,  5th 
Ed.,  p.  599,  Sec.  2),  which  forbids  the  making  of  divi- 
dends except  from  the  surplus  profits. 

It  follows  that  any  stockholder  has  the  right  to  object 
to  such  action. 


17 


If,  in  the  first  instance,  the  capital  is  fixed  at  a high 
figure  and  is  paid  for  in  part  only,  the  stockholder  may 
be  compelled  to  pay  up  the  balance. 

No  advantage  can  be  obtained  by  fixing  the  capital  at  a 
low  figure,  paying  for  it  in  full,  and  then  “ watering  ” it 
under  the  pretence  that  it  is  worth  more  than  the  original 
capital  stock,  and  that  the  watering  stock  is  to  be  treated 
as  full  paid  up  stock. 

The  personal  liability  of  a stockholder  on  account  of 
stock  only  partly  paid  could  not  be  thus  sucessfully 
evaded. 

In  the  case  of  a Telegraph  Company  incorporated  un- 
der the  laws  of  the  State  of  New  J orlc,  there  are  special 
reasons  why  a stockholder  can  object  to  the  “ watering” 
of  the  stock,  for  in  addition  to  its  illegality  it  imposes  up- 
on him  au  onerous  liability. 

Formerly,  a stockholder  in  a Telegraph  Company  in 
New  York  was  liable  for  the  debts  of  the  Company  to 
the  extent  of  25  per  cent,  of  the  amount  of  the  stock  held 
by  him. 

The  original  Telegraph  Act  {Laws  of  1848,  Ch.  265 
Sect.  10)  reads  thus  : 

u The  stockholders  of  every  association  organized  in 
“ pursuance  of  this  Act  shall  be  jointly  and  severally 
personally  liable  for  the  payment  of  all  debts  and  de- 
mands against  such  association  which  shall  be  contract- 
“ ed,  or  which  shall  be  or  shall  become  due  during  the 
“ time  of  their  holding  such  stock,  but  such  liability  of 
“ any  stockholder  shall  not  exceed  twenty-five  per  cent. 

“ in  amount  the  amount  of  stock  held  by  him.” 

By  the  Act  of  1853,  Chap.  471,  Sec.  4,  that  liability 
is  reduced,  but  it  is  25  per  cent,  of  the  amount  due  by 
the  stockholder  on  his  stock. 

This  act  is  quoted  by  Judge  Sedgwick  in  his  opinion  in 
the  Williams  case  (see  page  of  this  Brief). 


18 


When,  therefore,  the  stockholder  gets  his  stock  doubled 
by  the  watering  process,  he  becomes  personally  liable  for 
the  debts  of  the  company  to  the  extent  of  25  per  cent,  of 
the  amount  of  such  additional  stock. 

It  cannot,  therefore,  be  truly  said  that  a stockholder  is 
merely  caviling  when  he  objects  to  that  watering. 

Moreover  the  doubling  of  the  shares  of  stock  may 
cause  a doubling  of  the  taxation  of  the  company. 

Even  if,  as  suggested  by  Judge  Truax,  there  is  no  ob- 
jection to  the  watering  of  stock  when  it  is  not  prohibited 
by  legislation,  there  can  be  no  watering  of  the  stock  of 
a company  in  Hew  York  by  making  stock  dividends — 
such  dividends  being  prohibited. 

And  Telegraph  companies,  especially,  have  no  right  to 
water  their  stock,  seeing  that  the  stockholders  are  thereby 
subjected  to  a heavy  personal  liability.  That  liability 
cannot  be  imposed  upon  a stockholder  by  the  action  of  a 
majority  of  the  board  of  directors  and  of  the  stock- 
holders. 

Ho  authority  is  needed  for  the  proposition  that  a ma. 
jority  of  the  board  of  directors  and  of  the  stockholders 
can  have  no  power  at  common  law  to  subject  an  individ- 
ual stockholder  to  such  liability. 


If  more  capital  is  required  to  be  raised  by  the  issue  of 
additional  shares,  such  issue  is  amply  provided  for  by  the 
Hew  York  laws  relating  to  Telegraph  Companies,  and 
by  the  General  Act  of  1872,  ch.  Gil,  sec.  1,  but  the  stock 
so  issued  must  be  paid  for  in  cash  or  its  equivalent. 

Judge  Truax  refers  to  the  act  of  1875,  ch.  319,  pro- 
viding that  where  the  Articles  of  Association  of  a Tele- 
graph Company  fail  to  provide  for  an  increase  of  their 
capital  stock,  such  increase  may  be  made  after  the  publi- 


19 


cation  of  a certain  notice,  with  the  written  consent  of 
shareholders  holding  or  owning  f in  amount  of  the  then 
capital. 

And  the  Judge  adds: 

“The  Articles  of  Association  of  the  West.  Un.  Tel. 
Co.,  although  they  were  before  Chief  Judge  Sedgwick 
and  Judge  Spier,  were  not  offered  in  evidence  on  the 
trial  of  this  action. 

“ In  the  absence  of  evidence  to  the  contrary  a corpora- 
tion will  be  presumed  to  have  acted  in  conformity  to  its 
corporate  powers. 

“Chautauqua  Co.  Bank  v.  Risley,  19  N.  Y., 
369. 

“ De  Groof  v.  American  Linen  Thread  Co., 
21  id.,  124. 

“The  Western  Union  Tel.  Co.  has  complied  with  the 
requirements  of  this  law.  It  has  published  the  notice  as 
required,  and  has  obtained' the  written  consent  of  share- 
holders owning  and  holding  three-fourths  in  amount  of 
its  capital  stock.” 


As  to  the  original  Articles  of  Association  see  Plain- 
tiff's Brief  in  the  Court  below,  Point  12,  p.  11-16. 

It  is  not  to  be  presumed  in  the  absence  of  proof  that 
the  Western  Union  Tel.  Co.  was  authorized  by  its  origi- 
nal Articles  of  Association  to  increase  its  shares  of  stock 
without  restriction  and  for  gratuitous  distribution,  and  it 
will  not  be  asserted  that  the  laws  for  the  formation  of 
telegraph  companies  authorized  the  issue  of  stock  with- 
out payment  of  for  the  same  dollar  for  dollar. 

The  above  cited  Act  of  1875,  in  authorizing  telegraph 
companies  to  increase  their  shares  of  stock,  did  not  mean 
that  such  increased  shares  need  not  be  paid  for. 

There  is  no  legal  presumption  that  the  Western  Union 
has  acted  in  conformity  to  its  corporate  powers  in  the 
purchase  of  the  rival  telegraph  lines  or  in  making  the 
stock  dividend  in  question. 


20 


Point  1. 

The  plaintiff  is  not  estopped  fro  in  bringing  this  action 
by  the  fact  that  before  he  became  a stockholder  in  the 
Western  Union  Telegraph  Company  a project  had  been 
formed  by  some  of  the  Directors  of  that  Company  for 
the  consolidation  of  rival  telegraph  companies  with  that 
Company,  and  rumors  concerning  some  such  scheme  had 
reached  him. 


See  Judge  Truax’s  findings  on  this  point,  as  matter  of 
fact  and  law. 

Case,  fol.  533,  1st  finding  of  fact. 

Case,fol.  567,  1th  finding  of  law. 

See  ante  page  4,  a full  examination  of  this  question 
in  the  discussion  of  Judge  Truax’s  opinion. 

See  Plaintiff's  Brief  in  Court  below,  page  83,  91,  92, 
93. 

A stockholder  has  the  absolute  right  to  object  to  any 
act  of  the  Company  which  is  ultra  vires  or  illegal.  He 
may  object  to  the  continuance  of  such  act,  although 
it  may  have  had  its  commencement  before  he  became  a 
stockholder- 

Even  if  the  illegal  contract  in  question  bad  been  made 
before  plaintiff  became  a stockholder,  he  could  object  to 
the  future  payment  of  dividends  on  the  stock  illegally 
issued. 

Plaintiff's  brief  in  Court  below, p.  92,  93. 


21 


Point  2. 

The  Telegraph  Act  of  1870,  Chap.  5(58,  does  not  au- 
thorize the  purchase  of  the  telegraph  lines  of  the  Ameri- 
can Union  and  Atlantic  and  Pacific  Telegraph  Com- 
panies, the  principal  portions  of  those  lines  being  worked 
in  competition  with  parallel  lines  of  the  Western  Union. 

See  Case,  p.  10,  Bill  of  Complaint , Art.  5, 
fols.  27  to  30. 

And  Case,  p.  42,  Answer  of  the  Western 
Union,  fol.  125. 

See  argument  in  Plaintiff's  Brief  in  Court  below, 
pages  19  to  26. 

The  Act  of  1870  should  not  be  construed  so  as  to 
favor  the  suppression  of  competition  in  the  telegraph 
business. 

See  testimony  of  Dr.  Green,  the  President  of  the 
West.  Un.  Tel.  Co., 

(Case,  fols.  823,  824,  833  to  855,) 
showing  that  the  substantial  objects  of  the  consolidation 
was  to  remove  the  opposition  of  the  Am.  Un.  Company, 
and  bring  over  Mr.  Jay  Gould  and  his  influential  asso- 
ciates, having  great  influence  in  railroad  companies. 

See  also  the  testimony  of  Mr.  Wilson  G.  Hunt  one  of 
the  Directors  of  the  W.  U., 

(Case,  fols.  1068  to  1072,) 

showing  that  the  suppression  of  the  competition  was  the 
great  object  of  what  he  calls  the  “foundation  of  all  that 
consolidation.” 


22 


Point  3. 


The  proceedings  had  under  the  supposed  authority  of 
?6.  Act  of  18(  0 were  not  in  accordance  with  the  pro- 
visions of  that  act,  and  were  inoperative. 


See  Plaintiff’s  Brief  in  Court  below,  page  30 
to  34.  1 y 


The  proceedings  taken  by  the  three  telegraph  com- 
panies were  all  of  a loose  and  hasty  character,  the  parties 
thereto  being  impressed  with  the  belief  that  they  had 
onh  to  hurry  up  the  transfer  of  the  property  proposed  to 
lie  sold,  and  that  all  objections  would  thus  be  sur- 
mounted. 


See  Plaintiff's  Brief  in  Court  below, p.  30 
3 1 > showing  the  irregularities  in  the  ac- 
tion taken  under  the  Act  of  1870. 

An  illustration  of  this  is  shown  by  the  fact  that  the 
Western  Union  Board  of  Directors  did  not  make  the 
contract  for  the  purchase,  but  left  a material  part  of  the 
contract  to  be  made  by  the  Ex.  Committee.  The  Presi- 
dent of  the  Western  Union  innocently  observes  that  he 
supposed  the  Ex.  Committee  had  all  the  powers  of  the 
Board. 

Case,  fo.  79  S. 

) Certainly  the  Ex.  Committee  had  not  the  powers  of  the 
Board  in  regard  to  proceedings  under  the  Act  of  1870 
for  the  purchase  of  telegraph  lines  from  other  com- 
panies. 


23 


Point  4. 

The  Western  Union  could  not  acquire  by  purchase 
the  competing  lines  in  Pennsylvania  and  Ohio. 


See  Plaintiff's  Brief  in  Court  below,  p.  35. 


Point  5. 

The  American  Union  and  Atlantic  and  Pacfic  Tele- 
graph Companies  could  not  sell  and  convey  the  telegraph 
lines  in  States  other  than  the  State  of-  New  York  under 
the  authority  of  the  New  York  Act  of  1870. 


See  Plaintiff’ s Brief  in  Court  below , p.  36. 

This  Court  will  take  judicial  notice  of  the  fact  that 
telegraph  lines  run  over  public  streets  and  higways  by 
virtue  of  privileges  conferred  by  the  local  authorities  to 
parties  to  be  exercised  for  the  public  good. 

Such  privileges  are  on  common  law  principles  inalien- 
able. 

Terhune  v.  Phillips , 99  U.  S.,  529.  The  Court  will  take 
judicial  notice  of  a thing  which  is  in  the  common  knowl- 
edge. 


See  case  of  Thomas  v.  Railroad  Co.,  101  US  S3 
81  Ihe  Court  held  (page  82)  « that  the  powers  of  corpo 
lations  organized  under  legislative  statutes  are  such,  and 
such  only,. as  those  statutes  confer,”  and  that  “there  is 
another  principle  of  equal  importance  and  equally  con- 
clusive against  the  validity  of  this  contract,  which,  if  not 
coming  exactly  within  the  doctrine  of  ultra  vires,  as  we 
have  just  discussed  it,  shows  very  clearly  that  the  rail- 
load  company  was  without  the  power  to  make  such  a con- 


“That  principle  is  that  where  a corporation  like  a 
railroad  con, pany  has  granted  to  it  by  charter  a franchise 
intended  in  a large  measure  to  be  exercised  for  the  pub- 
ic good,  the  due  performance  of  those  functions  beino- 

whiehT1  °f  thG  PUbHc  ^rant’  contract 

Inch  disables  the  corporation  from  performing  those 

functions  which  undertakes  without  the  consent  of  the 

f , ° transtier  to  otbers  the  rights  and  powers  con- 
ferred by  the  charter  and  to  relieve  the  grantees  of  the 
burden  which  it  imposes,  is  a violation  of  the  contract 
" i h the  State,  ami  is  void  as  against  public  policy. 

This  doctrine  is  asserted  with  remarkable  clearness  by 
' ' ""  lce  ampbell  in  The  York  and  Maryland  Line 
Railroad  Company  v.  Winans,  17  How.,  30.” 

cLtlCn\tVT^  Blaek  DdaWOre  & 

anal  C o 22  N T.  Ey.,  130,  Chancellor  Zabriskie  says  • 

I may  be  considered  as  settled  that  a corporation  cam 
net  lease  or  alien  any  franchise  or  any  property  necessary 
o perform  its  obligations  and  duties  to  the  State  without 
i^ffori^’i M99.  For  this  he  cites  some  10 
lw  decided  eases  111  England  and  in  this  country.” 

It  the  W.  U.  Tel.  Comp,  desired  to  suppress  the  com 
petition  of  rival  telegraph  companies  it  should  not  have 
sought  to  accomplish  that  object  by  any  action  under  the 
supposed  authority  of  the  Act  of  1870  ; it  should  have  been 


25 


content  to  purchase  the  stock  of  those  companies  as  held 
bv  the  stockholders  thereof. 

That,  however,  would  not  have  been  in  accordance 
with  the  grand  and  dazzling  financial  scheme  for  raising 
the  capital  to  eighty  millions. 

The  stock  of  the  Western  Union  could  have  been  in- 
creased under  either  of  the  acts  of  IS 72  and  1875,  and 
with  that  stock  they  could  have  purchased  the  stock  of 
the  American  Union  and  American  and  Pacific  Tele- 
graphic Companies  from  the  stockholders  at  the  actual 
value  thereof. 


Point  6. 

The  contract  in  question  was  void  by  its  own  term.. 

(See.  10). 


* 


See  Plaintiff’s  Brief  in  Court  l>elow,p.  40. 


26 


Point  7. 

Increased  shares  of  Stock  must  be  fully  paid  for. 

Such  increased  shares  may  be  issued  under  the  general 
act  of  1872,  Ch.  611,  Sec.  1,  or  under  the  Telegraph  Act 
of  1875,  Gh.  319. 


See  Plaintiffs  Brief  in  Court  below , p.  27, 
28,  41. 

See  review  of  Judge  Truax’s  opinion  on  this 
point,  ante  pages 


Point  8. 

A telegraph  company  incorporated  under  the  laws  of 
this  State  cannot  increase  the  number  of  its  shares  of  its 
capital  stock  to  be  distributed  amongst  its  present  stock- 
holders as  a stock  dividend  to  represent  net  earnings 
which  the  Board  of  Directors  have  for  a series  of  years 
applied  to  increase  the  extent  of  its  telegraph  lines,  pur- 
chases of  patent  rights,  &c.,  with  the  consent  and  au- 
thority of  those  who  were  the  stockholders  at  the  sev- 
eral times  when  such  applications  have  been  made. 


See  ante  p.  10,  review  of  Judge  Truax’s 
opinion. 

And  see  Plaintif  s Brief  in  Court  below , 
p.  47  to  71. 


And  see  ante,  Point  7. 


27 


Point  9. 

The  plaintiff  can  maintain  this  action,  although  the  W. 
IT.  Telegraph  Co.  might  not  be  able  to  maintain  an  action 
to  rescind  the  contract  and  sale  in  question. 


See  Plaintiff's  Brief  in  Court  below,  p.  72  - 

to  78. 


Point  10. 

The  plaintiff  has  the  right  to  complain  of  the  violation 
of  the  law  by  the  W.  TJ.  Telegraph  Co.,  and  is  not  de- 
pendent upon  the  action  of  the  Attorney-General.  The 
plaintiff  has  a personal  interest  in  the  matter. 


Point  11. 

The  denial  of  the  motion  for  an  injunction  by  Judge 
Barrett  in  the  case  of  Hatch  v.  The  W.  TJ.  Tel.  Co.  is 
no  estoppel. 


See  Plaintiff's  B/iefin  Court  below,  p.  81. 


Point  12, 


There  is  no  equitable  estoppel  in  pais. 


bee  Plaintiff’s  Brief  in  Court  below,  popes 
83  to  88,  91  to  96. 


And  ante  page  4 <*t  seg.  of  this  brief. 


Point  13. 

As  to  the  Decree  prayed  for.  The  Court  is  bound  to 
adjudge  that  the  issue  of  the  155,265  shares  of  the  Wes- 
tern [ nion  Telegraph  Stock  is  invalid,  and  that  the  con- 
tract in  question  is  void,  notwithstanding  the  fact  that 
the  contract  has  been  acted  upon  by  the  Telegraph  Com- 
panies parties  thereto. 


See  Plaintiff’s  Brief  in  Court  below, p.  99  to 
105. 

And  see  ante  review  of  Judge  Truax’s  opinion. 

The  proposition  that  the  Decree  prayed  for  cannot  be 
had  because  the  purchase  by  the  W.  U.  of  the  other  tel- 
egraph lines  has  been  consummated  by  the  delivery 


29 


of  the  lines  to  the  W.  IT.,  and  the  issue  and  delivery  of 
the  W.  U.  stock  to  or  for  the  vendors  is  untenable. 

The  proposition  amounts  to  this  : An  illegal  act  can- 

not be  judicially  pronounced  to  be  illegal  if  it  has  been 
actually  perpetrated. 

We  maintain,  on  the  contrary,  that  the  contract  in 
question,  and  the  issue  of  the  155,265  shares  must  be  ad- 
judged to  be  illegal,  and  that  the  legai  consequences  of 
such  adjudication  must  follow. 

Of  course  there  can  be  no  injunction  forbidding  the 
doing  of  what  has  been  already  finally  done  and  com- 
pleted. In  such  case  the  legal  remedy  of  the  party  in- 
jured may  be  confined  to  a claim  for  damages. 

In  the  present  case  the  question  is  not  now  whether 
the  defendants  shall  be  restrained  by  injunction  from 
doing  what  they  have  done,  and  which  has  received  the 
sanction  of  the  judgment  of  Judge  Truax;  the  question 
is  whether  the  contracts  are  legal,  and  especially  whether 
the  W.  IT.  Tel.  Co.  had  legal  authority  to  issue  and  dis- 
tribute amongst  its  stockholders  as  a stock  dividend 
155,265  additional  shares  of  its  stock. 

The  question  as  to  the  validity  of  that  act  cannot  be 
affected  by  the  fact  that  the  W.  IT.  Tel.  Co.  has  actually 
committed  it. 

And  it  is  to  be  observed  that  that  Company,  and  all 
the  parties  concerned  who  have  taken  the  stock,  have 
acted  with  full  knowledge  of  the  pendency  of  this  litiga- 
tion. 

This  case  presents  to  the  Court  a gross  instance  of  the 
violation  of  the  law  against  stock  watering.  Public 
policy  demands  the  enforcement  of  the  law  forbidding 
such  acts. 


30 


The  ease  also  presents  to  the  Court  a flagrant  attempt 
to  make  a huge  monopoly  by  a perversion  of  the  laws  re- 
lating to  Telegraph  Companies  in  this  State. 

It  can  avail  nothing  to  say  that  the  wrongdoers  have 
accomplished  what  they  set  out  to  do— the  validity  of 
their  acts  is  now  the  subject  of  legal  scrutiny. 

Upon  the  rendition  of  a decree  that  the  sale  and  pur- 
chase of  the  American  Union  and  Atlantic  & Pacific 
Telegraph  Companies’  lines  by  the  Western  Union  was 
unlawful,  or  a decree  that  the  issue  of  the  155,265  shares 
t°  fhe  stockholders  of  the  Western  Union  was  illegal,  the 
3 Companies  will  find  it  necessary  to  submit  to  such  de- 
cree, and  devise  some  plan  of  adjustment  of  the  equities 
between  them. 

See  various  plans  suggested  in  Plaintiff’s 
Brief  in  the  Court  below,  p.  104. 

Some  difficulty  (not,  however,  insurmountable)  may 
arise  from  the  high-handed  way  in  which  the  companies 
have  carried  out  their  scheme  in  disregard  of  this  litiga- 
tion and  the  opinion  of  two  of  the  Judges  of  this  Court. 

Disregarding  these  opinions  the  defendants  have 
blended  the  stock  paid  to  the  stockholders  of  the  Ameri- 
can Union  and  Atlantic  & Pacific  Telegraph  Companies 
with  the  stock  of  the  Western  Union. 

The  contracts  of  Jan’y  19  and  Feb’y  3,  1881,  should  be 
treated  as  naught  for  the  reasons  before  stated,  especially 
on  account  of  the  invalidity  of  the  155,265  shares  of  the 
Western  Union  stock.  Without  the  issue  of  that  stock 
to  the  stockholders  of  the  Western  Union,  the  contract 
fails  entirely. 

See  1 laintiff's  Hr rej  in  Court  below,  pages 
37,  38,  40. 

The  question  is,  What  should  be  done  to  adjust  the 


31 

equities  of  the  parties  ? That  may  be  accomplished  thus  : 
Let  the  Western  Union  purchase  the  stock  held  by  the 
stockholders  of  the  American  Union  and  Atlantic  and 
Pacific.  The  Western  Union  can  make  that  purchase 
from  the  stockholders  or  their  assignees,  paying  therefor 
in  shares  of  the  W.  U.  Com’y,  to  be  issued  under  the 
Act  of  1875. 

See  Plaintiff's  Brief  in  the  Court  below , 
pages  104,  105. 

The  shares  of  stock  issued  under  the  articles  of  Jan’y 
19  and  Feb.  3,  1881,  should  be  cancelled,  and  in  lieu 
thereof  there  should  be  issued  new  shares  as  follows  (the 
Western  Union  retaining  its  original  400,000 


shares) 400,000 

Stockholders  of  the  Am.  Union 91, 775 J- 

“ “ Atlantic  and  Pacific ....  51,394§- 


543,170 

Thus  making  the  capital  stock  543,170  shares  instead  of 
800,000. 


In  Thomas  v. Railroad  Co.,  101  TJ.  S.,  71,  there  was  a 
full  discussion  of  “ the  principle  that  executed  contracts 
originally  ultra  vires  shall  stand  good  for  the  protection 
of.  rights  acquired  under  a completed  transaction,”  and  it 
was  held  that  the  principle  did  not  apply  to  that  case. 

The  R.  R.  Co.  made  a lease  of  its  railroad  for  20  years, 
and  the  lessors  resumed  possession  at  the  end  of  five 
years,  and  the  accounts  for  that  period  were  adjusted  and 
paid.  There  was  a condition  in  the  lease  to  pay  the  value 
of  the  unexpired  term,  and  the  question  was  whether 
that  condition  could  be  enforced.  It  was  held  that  it 
could  not. 

The  Court  held  that  the  lease  was  ultra  vires,  and  said 


32 


that  a contract  by  which  the  company  renders  itself  in- 
capable of  performing  its  duties  to  the  public,  or  attempts 
to  absolve  itself  from  its  obligation  without  the  consent 
of  the  State,  violates  its  charter  and  is  forbidden  by  public 
policy.  It  is  therefore  void.” 

The  argument  of  the  plaintiff's  counsel  was  as  follows 
p.  77—78 : 

“ The  authorities  establish  the  proposition  that  a con- 
tract not  forbidden  may  be  enforced  where  the  share- 
holders have  assented.  In  this  case  there  was  a prior 
unanimous  assent  and  a subsequent  unanimous  ratifica- 
tion,  and  the  illegal  parts,  if  any,  of  the  contract  has  been 
completely  executed. 

“ The  defence  of  ultra  vires  is  inadmissible  to  an  action 
against  a corporation  upon  'its  contract  duly  made , where 
(if  not  wholly  executed)  all  the  shareholders  have  ac- 
quiesced in  its  performance,  or  where  the  contract  has 
been  wholly  performed  by  the  other  paity  without  ob- 
jection on  the  part  of  the  corporation  or  any  of  the  share- 
holders. 


“ Where  the  transaction  is  complete  and  nothing  re- 
mains to  be  done  by  the  party  seeking  relief,  the  plea  of 
ultra  vires  is  not  available  by  the  corporation  in  an  ac- 
tion brought  against  it  for  not  performing  its  side  of  the 
contract.'’'1 

For  these  propositions  a great  number  of  decisions  of 
the  Supreme  Court  of  the  United  States,  and  of  the 
States  of  Hew  York,  Pennsylvania  and  Hew  Jersey  and 
other  States  are  cited. 


The  Court,  per  Miller,  J,  after  referring  to  the  decision 
of  the  House  of  Lords  that  a contract  ultra  vires  when 
made  by  the  Directors  cannot  be  enforced,  although  it 
has  been  ratified  by  the  shareholders,  says  that  the  con- 
tract in  question  was  a contract  forbidden  by  public 
policy ) and  beyond  the  powers  of  the  defendants  to  make. 


33 


‘•Having  entered  into  the  agreement,  it  was  the  duty  of 
the  Company  to  rescind  or  abandon  it  at  the  earliest  mo- 
ment. This  duty  was  independent  of  the  clause  in  the 
contract  which  gave  them  the  right  to  do  it.  Though 
they  delayed  its  performance  for  several  years  it  was 
nevertheless  a rightful  act  when  it  was  done.  Can  this 
performance  of  a legal  duty,  a duty  both  to  stockholders 
of  the  Company  and  to  the  public  give  to  plaintiffs  a 
right  of  action  ? Can  they  found  such  a right  on  an 
agreement  void  for  want  of  corporate  authority  and  for- 
bidden by  the  policy  of  the  law  ? ” 

“ To  hold  that  they  can  is,  in  our  opinion,  to  hold  that 
any  act  performed  in  executing  a void  contract  makes 
all  its  parts  valid,  and  that  the  more  that  is  done  under  a 
contract  forbidden  by  late,  the  stronger  is  the  chain  to 
its  enforcement  by  the  Courts .” 


A company  may  well  be  estopped  from  setting  up  the 
plea  of  ultra  vires  to  escape  from  a contract  which  it 
has  entered  into,  and  on  the  faith  of  which  the  other 
parties  to  the  contract  have  acted.  But’  this  is  not  a 
question  abont  the  right  of  the  Company  to  repudiate  its 
contract — the  question  is  as  to  the  rights  of  a stockholder 
to  object  to  the  violation  of  the  law. 

The  illegal  stock  dividend  cannot  be  made  valid  by  the 
obstinacy  of  the  Western  Union  in  insisting  upon  making 
that  dividend  and  distributing  the  stock  in  defiance  of 
the  plaintiff  in  this  case,  and  another  now  before  this 
Court. 

It  is  to  be  observed  that  the  Western  Union  could  by 
virtue  of  Clause  ID  of  the  contract  have  set  it  aside  on 
account  of  wants  of  the  corporate  capacity  to  issue  and 
distribute  the  155,265  shares  of  its  stock  amongst  its 
stockholders. 


34- 


Copy  Opinion  of  Judge  Truax  in  this 
Case,  as  Reported  in  the  N.  Y.  Reg- 
ister 23d  June,  1881. 

Truax,  ./. — “I  do  not  consider  it  worth  while  to  go 
over  again  the  grounds  gone  over  in  the  Williams  case. 
The  plaintiff  contends  that  the  agreements  made  by  the 
telegraph  companies  should  be  set  aside  because  they 
violate  laws  of  the  United  States,  and  of  Ohio  and  Penn- 
sylvania. The  law  of  the  United  States  above  referred 
to  is  as  follows  : 

' 1 Section  52b3. — Any  telegraph  company  now  organ- 
ized, or  which  may  hereafter  be  organized  under  the 
laws  of  any  State,  shall  have  the  right  to  construct, 
maintain  and  operate  lines  of  telegraph  through  and 
over  any  portion  of  the  public  domain  of  the  United 
States,  over  and  along  any  of  the  military  or  post  roads 
of  the  United  States  which  have  been  or  may  hereafter 
be  declared  such  by  law,  and  over,  under  or  across  the 
navigable  streams  or  waters  of  the  United  States  ; but 
such  lines  of  telegraph  shall  be  so  constructed  and  main- 
tained as  not  to  obstruct  the  navigation  of  such  streams 
and  waters,  or  interfere  with  the  ordinary  travel  on  such 
military  or  post  roads. 

“ ‘Sec.  5265. — The  rights  and  privileges  granted  under 
the  provisions  of  the  Act  of  July,;1866,  entitled  “ An  Act 
to  aid  in  the  construction  of  telegraph  lines,  and  to  secure 
to  the  Government  the  use  of  the  same  for  postal,  mili- 
tary and  other  purposes,”  or  under  this  title,  shall  not  be 
transferred  by  any  company,  acting  thereunder,  to  any 
other  corporation,  association  or  person. 

u ‘Sec.  5268. — Before  any  telegraph  company  shall  ex- 
ercise any  of  the  powers  or  privileges  conferred  by  law, 
such  company  shall  file  their  written  acceptance  with  the 
Postmaster-General  of  the  restrictions  and  obligations  re- 
quired by  law.’ 


35 


“ Judge  Blatcliford  passed  upon  this  law  in  the  ease  of 
the  Direct  Cable  Company  against  the  Atlantic  and 
Pacific  Telegraph  Company,  et  a/.,  as  follows : 

“ The  Court — I perceive  that  your  argument  about 
the  act  of  Congress  proceeds  upon  a certain  view  of  the 
provisions  of  the  statute.  As  you  seem  now  to  be  passing 
from  that  subject,  I will  state  that  it  occurs  to  me  that 
the  view  which  you  take  of  this  act  of  Congress  is  not 
at  all  admissible.  The  way  it  strikes  me  is  this  : This 
company,  the  Western  Union  Company,  had  a right,  by 
the  provisions  of  the  statute,  to  maintain  and  operate  its 
lines  of  telegraph,  and  they  are  to-day,  after  this  transfer, 
if  it  has  taken  place,  as  they  were  before  the  19th  of  Jan- 
uary. 

“ The  statute  says  that  before  any  telegraph  company 
shall  exerercise  any  of  its  powers — in  other  words,  before 
it  shall  operate  its  line  it  shall  file  a written  acceptance 
with  the  Postmaster-General  of  the  restrictions  and  obli- 
gations required  by  law.  The  Western  Union  has  done 
that.  It  has  filed  its  acceptance.  What  is  the  other  con- 
dition which  is  imposed  by  that  statute  ? It  is  that  the 
rights  and  privileges  granted  shall  not  be  transferred  by 
any  company  acting  thereunder  to  any  other  corporation, 
association  or  person. 


“ What  is  the  meaning  of  all  that  taken  together  \ It 
is  simply  that  anybody,  any  corporation  which  is  going 
to  exercise  any  function  under  this  act  shall  file  its  writ- 
ten acceptance.  The  question  is  simply  a question  be- 
tween the  United  States  and  these  people— that  they  shall 
not  acquire  the  rights  by  transfer,  but  by  filing  an  accept- 
ance. There  is  nothing  else  in  it.  It  has  nothing  to  do 
with  the  question  of  consideration  of  the  stock  of  tha  com- 
panies. The  United  States  do  not  undertake  to  regulate 
anything  of  the  sort.  This  differs  altogether  from  any 
view  of  it  that  has  been  taken,  but  that  is  the  way  it 
strikes  me.” 


# 


36 


“ ^r-  Oelafikld — As  I read  these  acts  they  provide 
that,  the  telegraph  companies,  after  having  tiled  their  as- 
sent to  the  provisions  of  the  statute,  may  then  obtain 
certain  rights  which  are  described  in  the  statute.  These 
rights  and  privileges  were  valuable,  and  they  are  the  only 
rights  and  privileges  under  which  the  Atlantic  and  Pacific 
Company  could  operate  outside  of  the  State  of  New  York, 
or,  in  fact,  get  outside  of  the  City  of  New  York,  as  in 
the  doing  so  it  had  to  pass  the  public  waters  of  the  United 
States..  The  condition  of  the  statute  is  that  the  rights 
and  privileges  granted  under  it  shall  not  be  transferred. 

The  ( ourt  But  they  do  not  get  their  rights  and 
privileges  by  transfer  at  all.  That  is  not  what  they 
get  by  the  transfer.  They  get  the  poles  and  the  wires 
and  the  batteries  by  the  transfer.  They  get  these 
rights  and  privileges  by  having  themselves  already  filed 
an  acceptance.  There  is  the  distinction.  It  seems  to  be 
perfectly  clear.  I do  not  think  the  statute  has  anything 
to  do  with  it. 

“ I am  of  the  opinion  that  this  transfer  should  not  be  set 
aside  on  the  ground  that  it’conflicts  with  the  statutes  of 
Pennsylvania  and  ( )hio,  which  say  that  no  telegraph  com- 
pany owning  a competing  line  therein  shall  acquire  by 
purchase  or  otherwise  the  lines  of  any  other  competing 
telegraphic  corporation,  nor  shall  any  such  telegraph  coim 
pany  be  consolidated  with  or  merged  into  any  other  tele- 
graph company. 

“ I am  of  the  opinion  that  these  statutes  apply  only 
to  telegraph  companies  organized  under  the  laws  of 
these  States,  and  neither  of  the  parties  to  this  suit 
was  organized  under  the  laws  of  either  of  these  States. 
But  at  most,  if  the  law  does  apply,  then  the  Western 
Union  Company  cannot  take  possession  of  the  lines  of  the 
American  Union  Telegraph  Company  in  the  States  of 
Pennsylvania  and  Ohio.  There  is  no  proof  of  the  value 
or  extent  of  the  lines  in  those  States,  but  is  a partial  fail- 
ure of  consideration — how  much  of  a failure  has  not  been 
proved.  The  contracts  will  not  be  set  aside  on  the 
ground  of  partial  failure  of  consideration.” 


Opinion  of  Judge  Truax  in  the  Williams 

Case. 

[Printed  in  the  “Case  on  Appeal  ” in  Williams  v.  The 
TT.  (J.  Tel.  Co .,  now  before  this  Court.] 

I have  found,  as  matters  of  fact,  that  the  defendants, 
Jay  Gould,  Russell  Sage  and  Thomas  T.  Eckert,  did  not 
enter  into  an  unlawful  combination  or  agreement  with 
divers  persons  connected  with  the  Atlantic  and  Pacific 
Telegraph  Company,  The  Western  Union  Telegraph 
Company  and  the  American  Union  Telegraph  Company, 
for  the  purpose  of  uniting  together  large  amounts  of 
capital,  and  for  the  purpose  of  depressing  the  stocks  of 
the  several  telegraph  companies  in  the  market,  in  order 
that  they  might  get  control  of  the  three  companies,  after 
the  holders  of  the  stock  of  said  companies  had  been 
frightened  into  the  belief  that  a “telegraph  war”  was 
impending,  and  had  sold  their  stock. 

I have  also  found  that  the  other  allegations  of  fraud 
and  conspiracy  made  in  the  complaint  against  the  said 
defendants  and  others  were  not  proved  on  the  trial. 

One  of  the  very  able  counsel  for  the  plaintiff,  in  his 
argument  at  the  close  of  the  trial  of  this  case,  said  that  he 
was  not  going  to  lament  the  fact  that  he  had  failed  to 
show  such  a combination  ; that  he  had  not  been  able  to 
prove  certain  things  by  the  defendants. 

I have  also  found  that  the  property  of  the  American 
Union  was  worth  $15,000,000,  and  that  of  the  Atlantic 
and  Pacific  $8,400,000. 

The  plaintiff  alleges  in  his  complaint  that  the  real 
value  of  the  property  of  these  two  companies  does 
not  exceed  the  sum  of  $8,000,000,  and  to  prove  that 
allegation  called,  among  others,  Mr.  Eckert,  Dr.  Green, 


38 


Mr.  Bates,  Mr.  Shivley,  Mr.  Van  Horne,  Mr.  Sanford 
and  Mr.  Scliaffner.  Mr.  Schaffner  could  not  say  whether 
lie  was  or  was  not  an  expert  in  determining  the  cost  of 
the  construction  of  the  telegraph  lines,  but  said  he  could 
tell  pretty  well  what  a line  would  cost  if  he  knew  the 
market  price  ot  the  materials.  I have  endeavored  to  as- 
certain from  his  testimony  what  the  value  of  the  prop- 
erty of  the  American  Union  was,  and  I have  come  to  the 
conclusion  that  this  witness  would  have  fixed  the  value, 
if  he  had  named  it,  at  about  1-4,000,000  to  $6,000,000. 

Mr.  Sanford  thought  the  poles  and  wires  could  be  put 
up  for  $7,000,000,  while  Gen.  Eckert  testified  that  on  the 
19th  day  of  January,  1881,  it  would  have  cost  about 
$10,000,000  “ to  build  a set  of  telegraph  lines,  plants  and 
other  appurtenances  to  the  telegraph  business  of  the  ex- 
tent and  capacity  of  those  possessed  by  the  American 
Union,  and  sold  to  the  Western  Union,”  and  that  now 
it  would  cost  more  because  materials  and  labor  are 
higher.  In  this  he  is  corroborated  by  Mr.  Shivler. 

Gen.  Eckert  said  that  he  considered  the  property 
of  the  American  Union  to  be  worth  $20,000,000, 
and  that  he  estimated  its  value  from  the  earning  capacity 
of  the  property.  Besides  this  the  American  Union  had 
a great  many  valuable  contracts  with  railroads  which  it 
would  have  been  impossible  in  January,  1881,  to  replace 
• oi-  reproduce. 


In  the  case  of  the  Commonwealth  against  the  Hamil- 
ton Manufacturing  Company,  12  Allen,  302,  Chief  Jus- 
tice Bigelow  says  : “ Undoubtedly  the  amount  of  property 
belonging  to  a corporation  is  one  of  the  considerations 
which  enters  into  the  market  value  of  its  shares,  but  such 
market  value  also  embraces  other  essential  elements.  It 
is  not  made  up  solely  by  the  valuation  or  estimate  which 
may  be  put  on  the  corporate  property,  but  it  also  includes 
the  profits  and  gains  which  have  attended  its  operations, 
the  prospect  of  its  future  success,  the  nature  and  extent 


39 


of  its  corporate  rights  and  privileges,  and  the  skill  and 
ability  with  which  its  business  is  managed.  In  other 
words,  it  is  the  estimate  put  on  the  potentiality  of  a cor- 
poration, on  its  capacity  to  avail  itself  profitably  of  its 
franchise,  and  on  the  mode  in  which  it  uses  its  privileges 
as  a corporate  body  which  materially  influences,  and  often 
controls  its  market  value.” 

I think  the  evidence  warrants  the  conclusion  that  the 
property  of  these  two  companies  was  worth  the  sum  paid 
for  it  by  the  Western  Union.  At  any  rate  the  difference 
between  the  actual  value  and  the  sum  paid,  the  inade- 
quacy of  price  is  not  so  great  that  1 would  be  authorized 
in  finding  that  the  agreement  was  fraudulent  and  there- 
fore should  be  set  aside  on  that  ground  alone. 

2 Kent’s  Com.,  477. 

1 Pars,  on  Cont.,  492,  and  cases  there  cited. 

I have  also  found  that  the  scrip  dividend  of  $15,526,- 
590  represents  surplus  earnings  of  the  Western  Union 
Telegraph  Company,  made  since  the  first  day  of  July, 
1866,  which  had.  by  and  with  the  consent  of  the  stock- 
holders of  said  company,  been  invested  from  time  to  time 
in  property  necessary  and  useful  in  and  about  the  busi- 
ness of  said  company  ; that  said  property  was  in  the  pos- 
session of  the  company  on  the  19th  day  of  January,  1881, 
and  that  said  property  was  then  worth  the  sum  of 
$15,526,590. 

The  question  then  arises  upon  these  findings,  is  a cor- 
poration organized  under  the  laws  of  the  State  of  New 

ork  authorized  by  these  laws  to  issue  scrip  dividends 
to  represent  its  surplus  earnings,  which  have  from  time 
to  time  been  used  to  purchase  new  plant,  or  rather,  is  it 
prohibited  by  the  laws  of  the  State  of  New  York  from 
so  doing? 

1 have  held  as  matter  of  law,  that  the  laws  of  the 
State  of  New  York,  do  authorize  the  Western  Union  Tel- 


I 


40 


egraph  Company  to  issue  stock  for  this  $15,526,590  sur- 
plus earnings. 

The  plaintiff  contends  that  such  issuing  of  stock 
is  prohibited  by  the  laws  of  this  State,  and  calls  the 
attention  of  the  Court  to  the  following  portion  of  the 
Revised  Statutes:  “It  shall  not  be  lawful  for  the  di- 
rectors or  managers  of  any  incorporated  company  in  this 
State  to  make  dividends  excepting  from  the  surplus 
profits  arising  from  the  business  of  such  corporation  ; 
and  it  shall  not  be  lawful  foj-  the  directors  of  any  such 
company  to  divide,  withdraw  or  in  any,  way  pay  to  the 
stockholders,  or  any  of  them,  any  part  of  the  capital 
stock  of  such  company,  or  to  reduce  the  capital  stock, 
without  the  consent  of  the  Legislature.”  2 Rev  Stat 
(6th  Ed.),  398. 

If  the  defendant,  The  Western  Union  Telegraph  Com- 
pany, has  divided  any  portion  of  its  capital  stock  among 
its  . stockholders,  it  comes  within  this  statute,  and  the 
plaintiff  is  entitled  to  maintain  the  injunction  already  is- 
sued. 

What  is  the  meaning  of  the  words,  “capital  stock,”  in 
the  statute  above  cited  % 

1 be  capital  stock  is  not  only  the  money  put  into  the 
corporate  fund;  it  is  also  the  property  put  into  that 
fund;  it  is  to  be  distinguished  from  the  certificates  is- 
sued by  the  corporation  usually  called  stock  certifi- 
cates, which  are  simply  the  written  evidence  of  the 
holder’s  right  to  participate  in  the  surplus  profits  of  the 
corporation  during  its  existence  in  the  proportion  that 
the  shares  held  by  him  was  to  the  whole  number  of 
shares  into  which  the  corporate  property  is  divided,  and, 
on  the  dissolution  of  the  corporation  to  participate  in  the 
bume  proportion  in  the  division  of  the  corporate  property 
aftei  payment  of  the  debts  of  the  corporation. 

Hyatt  v.  Allen,  55  U.  Y.,  553. 

Jones  v.  Terre  Haute  R.  R.  Co.,  57  N Y 
196.  '» 

Burrell  v.  Bushwick  R.  R.  Co.,  75  id.,  216. 
Pierce  on  Railroads  (2d  Ed.),  110. 


11 


A holder  of  such  a certificate  acquires  uo  right  to  take 
away  any  portion  of  the  corporate  property  (75  N.  Y., 
216). 

The  corporate  property — the  “ capital  stock  ” of  a 
corporation — is  not  divided,  or  withdrawn,  or  reduced 
by  the  issuing  of  such  certificates. 

The  corporate  fund— the  capital  stock — still  remains 
the  same. 

“The  word  stock,”  said  the  Court  of  Appeals  in  Burn 
v.  Wilcox,  22  N.  Y.,  551,  *has  various  significations, 
but,  as  applied  to  joint  stock  associations  or  corporations, 
it  means  the  property  and  franchises  of  the  company. 
It  is  sometimes  used  to  designate  the  certificate  or  scrip 
issued  to  the  stockholders,  but  this  is  an  inappropriate  use 
of  the  word.  The  scrip  is  not  the  stock.” 

I am  of  the  opinion  that  the  statute  means  that  no 
corporation  shall  divide  among  its  shareholders  any  por- 
tion of  “the  property  and  franchises  of  the  company,” 
and  that  the  action  of  the  defendant,  The  Western  Union 
Telegraph  Company,  in  issuing  the  said  $15,526,590  of 
certificates  of  stock,  of  which  action  the  plaintiff  com- 
plains, is  not  prohibited  by  the  statute  above  quoted. 

The  defendants  contend  that  the  increase  in  the  capital 
stock  of  the  Western  Union  to  $80,000,000  was  author- 
ized by  Chapter  319  of  the  Laws  of  1875.  The  plaintiff 
contends  that  when,  under  that  act,  an  addition  is  made 
to  the  capital,  it  must  be  paid  for,  and  that,  unless  legis- 
lative authority  is  given  to  issue  stock  for  a consideration 
other  than  money,  it  must  be  paid  for  in  money  or  in 
money’s  worth. 

I have  held,  as  matter  of  fact,  that  the  $15,526,590  of 
stock  was  issued  for  a valuable  consideration,  and  that  it 
has  been  paid  for  with  $15,526,590  of  property. 

It  is  the  law  in  this  State  that  in  the  absence  of  any 
statutory  restriction  a corporation  has  power  to  receive 


42 


payment  otherwise  than  in  money  for  subscription  to  the 
capital  stock. 

East  New  York,  &c.,  R.  R.  Co.  vs.  Light- 
hull,  5 Abb.,  N.  S.,  458. 

This  is  one  of  the  common  law  powers  of  a cor- 
poration. “Such  common  law  powers,”-  said  the 
General  Term  of  this  Court  in  the  case  cited  above, 
“are  the  same  as  those  possessed  by  individuals, 
and  may  be  employed  in  the  same  manner,  unless 
restricted  by  some  positive  of  clearly  implied  prohibition 
of  law  (Barry  v.  Merchants’  Exchange  Co.,  1 Sandf.  C., 
,580;  De  Groff  v.  Am.  Linen  Thread  Co.,  21  N.  Y.,  124) 
and  the  objection  that  an  act  of  a corporation  is  ultra 
mres  rests  upon  the  absence  of  either  express  or  implied 
power,  and  not  upon  the  wrong  use  of  it.” 

In  the  case  of  Barry  y.  Merchants’  Exchange  Com- 
pany,  it  was  held  that  the  capital  stock  of  a corporation 
mentioned  in  its  charter,  is  not  per  se  a limitation  of  the 
amount  of  property,  either  real  or  personal,  which  it  may 
own.  It  may  divide  its  profits  among  the  stockholders 
at  such  times  and  to  such  amount  as  the  directors  may 
deem  expedient.  Instead  of  dividing  the  profits  they 
may,  in  their  discretion,  permit  the  surplus  of  property 
to  accumulate  beyond  their  oiiginal  capital  as  the  inter- 
est of  the  corporation  shall  appear  to  dictate. 

It  seems  to  me,  then,  that  if  a corporation  has  a right 
to  allow  its  corporate  fund— its  capital  stock — to  increase 
beyond  the  limit  fixed  for  its  capitalization  by  its  char- 
ter, it  has,  in  the  manner  provided  by  law,  a right  to 
increase  the  number  of  certificates  which  represent  the 
interest  its  stockholders  have  in  its  corporate  fund. 

I do  not  mean  to  be  understood  as  saying  that  a cor- 
poration has  a legal  right  to  issue  certificates  of  stock  be- 
yond the  value  of  its  corporate  property — in  other  words, 
that  a corporation  has  a right  to  “ water  ” its  stock.  I do 
not  pass  upon  that  question. 


4:3 


I have  held,  as  a matter  of  fact,  that  the  Western 
Union  Telegraph  Company  has  not  watered  its  stock. 

It  was  proved  on  the  trial  of  this  action  that  money 
earned  by  the  said  company,  and  which  was  the  profits 
of  the . business  of  the  company  and  as  such  was  avail- 
able for  the  purpose  of  dividends,  had  been  used  by  the 
company  in  purchasing  new  permanent  assets  for  which 
no  stock  had  been  issued. 

It  is  not  an  unusual  thing  for  corporations  to  allow  a 
surplus  to  accumulate  and  to  be  held  by  the  corporation 
either  in  money  or  in  other  property,  until  in  course  of 
time,  certificates  of  capital  stock  are  issued  to  the  stock- 
holders to  rep%sent  their  interest  in  these  accumulations. 

Such  a transaction  is  neither  in  law  or  in  fact  a “ water- 
ing’’ of  the  stock  of  a corporation.  -F or  the  certificates 
of  stock  the  corporation  holds  either  the  money  or  the 
property  to  the  full  amount  of  certificates  issued,  and  it 
falls  neither  within  the  spirit  nor  the  letter  of  'the  law,  if 
there  be  such  a law,  against  the  inflation  of  the  capital 
stock  of  a corporation  like  the  Western  Union  Telegraph 
Company. 

The  true  test  of  the  transaction  is,  has  the  money  of 
the  stockholders  to  the  amount  represented  by  the  pro- 
posed issue  of  certificates  been  retained,  and  is  it  held 
bv  the  company  either  in  money  or  in  property  ? 

If  so  it  is  proper  that  the  interest  of  the  stockholders 
in  such  accumulation  should  be  represented  in  his  hands 
by  certificates  of  stock.  Courts  have  frequently  been 
called  upon  to  determine  whether  such  accumulations  be- 
long, when  they  come  to  be  divided,  to  the  stockholders 
of  record,  at  the  time  the  accumulations  were  made,  or 
to  the  stockholders  at  the  time  of  making  the  division. 

It  is  now  well  settled  that  a shareholder  in  a corpora- 
tion has  no  legal  title  to  its  accumulated  profits  until  they 
are  divided,  and  when  divided  they  go  to  their  share- 
holders. 


Ilyatt  v.  Allen,  55  N.  V.,  553. 

Jones  v.  Terre  Haute  It.  It.  Co.,  57  id.,  196. 


44 


Incident  to  the  ownership  of  stock  in  a corporation  and 
passing  with  the  assignment  of  shares  thereof  is  the  right 
to  receive  the  proportional  share  of  all  the  profits  not  di- 
vided at  the  time  of  the  purchase  of  the  shares,  and  it  is 
immaterial  at  what  time  and  from  what  source  these  pro- 
fits have  been  earned. 

1 have,  therefore,  reached  the  conclusion  that  the  pro- 
posed issue  of  new  stock  upon  the  evidence  in  this  case 
does  not  come  within  the  spirit  or  the  letter  of  the  law 
against  watering  stocks,  if  there  be  such  a law. 


\Y  itliin  the  past  quarter  of  a century  a j^eat  many  cor- 
porations have  “ watered  ’ their  stock,  and  such  transac- 
tions have  frequently  been  before  the  courts  of  this  and  of 
other  States,  and  the  able  counsel  for  the  plaintiff  have 
not  found  any  case  in  which  the  Court  has,  in  express 
terms,  expressed  its  disapproval  of  such  transaction. 

There  are,  on  the  other  hand,  cases  in  which  the  courts 
have  approved  “ the  issue  of  dividends  of  stock  where 
there  were  not  earnings  properly  applicable  to  the  pur- 
poses of  a dividend  in  cash,  and  it  was  deemed  expedi- 
ent to  retain  the  amount  in  order  to  make  permanent 
improvements  or  pay  debts.”  I quote  the  language  of 
Pierce  on  Law  of  Railroads  (p.  123),  a recognized  author- 
ity. The  question  was  also  decided  by  a Judge  of  the 
Supreme  Court  of  the  State  in  Howell  v.  Chicago  and 
N.  W.  Railroad  Company,  51  Barb.,  378. 

There  are  also  numerous  cases  in  which  the  question 
has  been  collaterally  before  the  courts,  and  in  no  instance 
have  the  courts  denied  the  rights  of  corporations  to  issue 
an  increased  amount  of  stock  to  represent  accumulations. 
Dividends  of  stock  have  been  issued  to  pay  interest  on  stock 
(Ohio  City  v.  Cleveland  and  T.  R.  Co.  6 Ohio  St.,  489). 

“ Whatever  disposition  was  made  ” (of  such  a distribu- 
tion of  stock)  said  the  General  Term  of  the  Supreme 


Court  in  Miller  o.  Illinois  Central  Railroad,  21  Barb., 
331,  “ whatever  disposition  was  made  of  it,  the  stock- 
holders get  the  benefit  of  it  directly  or  indirectly.  See 
also  Jones  v.  Terre  Haute  Railroad  Company,  57  N.  Y., 
196 ; State  v.  Baltimore  and  Ohio  Railroad  Company,  6 
Gill,  363;  Boston  and  Lowell  Railroad  Company  o. 
Commonwealth,  100  Mass.,  399. 

Chapter  319  of  the  Laws  of  1875  provides  the  manner 
in  which  a company  organized  under  the  laws  providing 
for  the  incorporation  of  telegraph  companies  can  increase 
the  number  of  shares  of  its  capital  stock. 

It  says : “ It  shall  be  lawful  for  any  association  of  per- 
sons organized  under  this  act,  by  their  articles  of  associa- 
tion to  provide  for  an  increase  of  their  capital,  and  the 
number  of  shares  of  the  capital  stock  of  the  association, 
hut  if  any  such  association  shall  have  omitted  to  so  pro- 
vide for  an  increase  of  their  capital,  it  shall  he  lawful, 
after  notice  of  the  intention  so  to  do,  published  once  a 
week  for  six  weeks  successively  in  the  State  paper,  and 
in  any  newspaper  of  general  circulation  published  in  the 
county  where  the  principal  office  of  such  company  is 
located,  and  with  the  written  consent  of  shareholders  hold- 
ing and  owning  three-fourths  in  amount  of  the  then 
capital,  to  provide  for  an  increase  thereof,  and  the  num- 
ber of  shares  into  which  the  same  shall  be  divided.” 


The  articles  of  association  of  the  Western  Union  Tele-, 
egrapli  Company,  although  they  were  before  Chief  Judge 
Sedgwick  and  Judge  Spier,  were  not  offered  in  evidence 
on  the  trial  of  this  action. 

In  the  absence  of  evidence  to  the  contrary,  a corpora- 
tion will  be  presumed  to  have  acted  in  conformity  to  its 
corporate  powers. 

Chautauqua  Co.  Bank  v.  Risley,  19  N.  Y., 
369. 

I)e  Groff  v.  American  Linen  Thread  Co.,  21 
Id.,  124. 


46 


The  Western  Union  Telegraph  Company  has  complied 
with  the  requirements  of  this  law.  It  has  published  the 
notice  as  required,  and  has  obtained  the  written  consent 
of  shareholders  owning  and  holding  three-fourths  in 
amount  of  its  capital  stock. 

I am  also  of  the  opinion  that  this  increase  of  capital 
stock,  authorized  as  it  is  by  the  laws  of  this  State,  is  not 
against  public  policy.  It  may  be  against  the  public 
good,  I nit  it  cannot  be  against  public  policy — or  as  it  is 
sometimes  called,  the  policy  of  the  law-because  the  law 
making  power  of  the  State  has  allowed  it.  Courts  since 
the  tune  of  Henry  V.  have  held  that*-  contracts  in 
restraint  of  trade  are  against  public  policy.  Such 
contracts  are  neither  expressly  nor  impliedly  author- 
lZi(  statute’  vet  if  the  Legislature  should  de- 
<•  are  that  hereafter  no  such  contract  should  be 
against  public  policy,  such  contract  would  not  be  against 
public  policy.  It  is  within  the  power  of  the  Legislature 
to  say  what  is  and  what  is  not  against  public  policy,  and 
having  said  it  is  the  duty  of  the  Courts  “ to  declare  the 
law  and  not  to  make  law.” 


Holding  as  I do  upon  the  main  question  in  this  action 
I do  not  consider  it  worth  while  to  discuss  whether  the 
plaintiff  is  a “litigious  volunteer,”  whether  he  is  “hawk 
mg  the  process  of  the  Court,”  whether  the  fact  that  the 
agreement  of  January  19th  has  been  executed,  or  whether 
the  plaintiff  has  acquiesced  in  the  agreement  is  a defense 
to  the  action. 


Judgment  for  the  defendants  is  ordered  with  costs, 

wtC. 

CHARLES  H.  TRUAX, 

J udge. 


/ 


UNIVERSITY  OF  ILLINOIS-URBAN  A 


L 3 0112  068218434  j 


